India has made enormous strides since it achieved independence more than 50 years ago. Economic growth since 1980 has been among the fastest in the world; social indicators for literacy, education enrollment, disease and mortality, and gender have steadily improved; and poverty has fallen since the mid-1970s.

India has also developed a diversified industrial base and a relatively large and sophisticated financial sector. Its software subsector - one of the most dynamic in the world - has experienced a sustained and rapid upswing, with exports rising from US$734 million during the 1995-96 fiscal year to US$2,650 million in fiscal year 1998-99. Software exports are projected at US$3,925 million in fiscal 1999-00, demonstrating the continued strength of the subsector. These successes have taken place against a backdrop of India's well-established democratic system - the largest in the world - which provides its population with a significant degree of political freedom and stability.

DEVELOPMENT CHALLENGES

Reducing Poverty and Raising Living Standards

Improving the living standards of the poor remains one of India's most pressing challenges. In the early 1950s, nearly half of India's population was living in poverty. Since then, poverty has been declining, though slowly, and vast disparities between and within India's 25 states persist. With a gross national product (GNP) per capita of US$440 in 1999, India continues to have the highest concentration of poverty of any country, with more than 360 million people - about 36 percent of the population - living below the official poverty line. Based on an international poverty line 1 , India accounts for an estimated 40 percent of the world's poor.

Addressing Health and Nutrition Needs

The well-being of India's population has improved since the 1970s. Average life expectancy at birth has increased from 50 years to 63 today, the infant mortality rate has fallen by half to about 60 per 1,000 live births, and the birthrate has fallen by half to about 3 children per woman. Yet India's social indicators are poor by most measures of human development.

India's national family welfare program has helped move the country about two-thirds of the way toward its goal of replacement- level fertility (2.1 births per woman.). However, population growth and the impending strain on the environment, natural resources, and social services still pose a threat to India's development. With an estimated population of 1 billion people, second only to China's, India leads the world in terms of population growth-currently at 16 million each year.

Malnutrition poses a continuing constraint to India's development. Despite improvements in health and well-being, malnutrition remains a silent emergency in India. More than half of all children under the age of four are malnourished and 30 percent of newborns are significantly underweight. The World Bank estimates that malnutrition costs India at least US$10 billion annually in terms of lost productivity, illness, and death and is seriously retarding improvements in human development.

Despite some improvement, India's women remain significantly more malnourished than men, and 60 percent of Indian women are anemic. Bias against women and girls is reflected in the demographic ratio of 929 females for every 1,000 males. In India, unlike most countries, more women than men die before the age of 35. India's maternal mortality rates are very high, particularly in rural areas, ranging from 440 to 580 deaths per 100,000 live births. Maternal deaths in India account for almost 25 percent of the world's childbirth-related deaths.

Although declining, largely preventable diseases such as leprosy, tuberculosis, cataract blindness, and malaria continue to account for 50 percent of reported illness, and around 470 deaths per 100,000. India has the largest remaining pool of polio transmission in the world. Despite a decade of polio initiatives under India's immunization program, India accounted for more than two-thirds of polio cases reported worldwide in 1998.

HIV / AIDS is a newly emerging threat to India's public health. In India alone, 4 to 5 million people are infected with HIV and the number of new infections doubles every 14 months. Although the rates in the general population are still low, in absolute numbers India now has the largest HIV positive population in the world.

Since 1991, the World Bank has significantly increased its emphasis on health sector development in India. It has aimed to reduce the level of deaths, illness, and disability through a two-pronged approach. First, the World Bank supports high-priority programs to reduce the spread of significant diseases such as HIV/AIDS, leprosy, tuberculosis, cataract blindness, and malaria. Second, the World Bank supports strengthening the performance of state health systems, mainly at the referral and primary level.

The World Bank-assisted Woman and Child Development Project seeks to improve nutrition policies and programs and the World Bank is also assisting the government reduce fertility, stem population growth, and improve women's health through the national reproductive and child health program and several stand-alone population projects. The World Bank-supported Reproductive and Child Health Project and Immunization Project are working to intensify efforts to eradicate polio and reduce vaccine- preventable diseases.

Expanding Access to Education

India made modest increases in primary education enrollment rates in the 1990s and today has the world's second largest education system after China, with 108 million children aged 6-10 attend-ing primary school.

The rise in literacy rates over the last decade is indication of India's progress in education. From 1991- 99, the overall literacy rate increased from 52 percent to 64 percent. Yet more than half of Indian women are still illiterate; about 40 million primary school-age children are not in school (mostly girls and those from the poorest and socially-excluded households); and only about one-third of an age group completes the constitutionally prescribed eight years of education. India still has much work to do to elevate its human resources to the levels needed to sustain current economic growth rates.

To support India's goal of achieving universal primary education, the World Bank has been supporting the District Primary Education Program (DPEP.) This successful program has boosted school enrollment - particularly among girls and disadvantaged children. Achievement testing indicates that DPEP is improving the quality of instruction and learning achievement in the early grades.

The World Bank has also provided support to technical and vocational education. Three recently completed projects in this area helped boost the quality and efficiency of technical education, and a fourth, in states not served by the earlier projects, will begin soon. Building on the successes of previous projects, recently completed studies of upper primary education is expected to increase future World Bank involvement at this level of education.

Furthering Fiscal Reform

A major obstacle to further development lies in India's large central and state fiscal deficits, which are a risk to macroeconomic stability, divert funding from the private sector, and hinder financial sector reform. Since the major adjustment of 1991-93, subsequent deficit reductions have been limited, leading to a general government fiscal deficit (comprising the central and state governments) of 9.6 percent of GDP in 1999-00 - one of the largest fiscal deficits in the world.

At the state level, the lack of deficit reduction has put India's poorer states in an increasingly unsustainable position. The deterioration in the states' finances has been accompanied by a decline in state expenditures in critical areas such as health, education, roads, and irrigation.

Concurrently, there has been an increase in spending on loss-making state enterprises and massive subsidies for power, water, irrigation, and transport. Some states such as Andhra Pradesh, Haryana, Gujarat, Orissa, Uttar Pradesh, and Karnataka, have begun to address these problems. Major reasons for the continued large central and state deficits are the heavy subsidies that encourage inefficiencies, the narrow tax base, and the cost of the large civil service. Public sector production remains large in areas where private production would be more efficient, reflecting limited progress on privatization.

Private Sector Development

Many of the World Bank's programs increasingly rely on the private sector to assist in the delivery of services. The World Bank aims to promote efficient private sector development by assisting the government in identifying the remaining constraints to private investment in infrastructure. In response to a request from the government, the World Bank has prepared a Private Infrastructure Framework for India which identifies existing constraints and makes recommendations for further policy, regulatory, and financial reforms to facilitate private investment in infrastructure.

The International Finance Corporation (IFC), the World Bank's private sector lending arm, has been focusing on projects that support private entry into areas such as infrastructure, banking, insurance, contractual savings, and the mutual fund industry. Other areas of investment include agribusiness, health and education, knowledge-based industries, and development of the small and medium-size enterprise sector.

Financing Infrastructure

Improving basic infrastructure services and encouraging greater private sector participation in telecommunications, electricity, transport, and water supply can make a major contribution to growth and have been a major focus of Indian economic policy since the early 1990s.

Notwithstanding this progress, the introduction of private capital in key infrastructure subsectors has been slower than anticipated, as have results. Few investments have been brought to closure under the new national policies. Improved sectoral regulatory frameworks and independent and empowered regulatory authorities would stimulate efficient private sector participation.

In the roads sector, the World Bank is supporting an ambitious program of highway maintenance and construction at the national and state-level. The Third National Highways Project was approved in June 2000, with support from an IBRD loan of US$516 million. This project covers some of India's least-developed states such as Uttar Pradesh and Bihar which have almost completely missed out on the recent economic growth, in part because of poor infrastructure.

The Andhra Pradesh State Highway Project is also the first in a series of state highway projects aimed at relieving traffic congestion by widening and upgrading priority roads, enhancing road maintenance, and strengthening state road agencies' ability to manage road programs and assets.

In the urban sector, the World Bank is working with a number of state governments and municipalities to make the urban water sector financially viable, to help water utilities become commercially-oriented, to increase private sector competition, and to enhance the delivery of municipal services.

In telecommunications, the World Bank is helping the government to implement its program of reforms in the sector and establish an appropriate regulatory framework for opening the sector to competition from private sector operators. The Telecommunications Sector Reform Technical Assistance Project, approved in May 2000, will help India strengthen the regulatory role of government agencies responsible for the sector and improve the management of the radio frequencies for radio stations, cellular phones, satellite communications, and long-distance telephone and data traffic.

Meeting Energy Needs

Economic growth in India will continue to be hampered as long as poor power supply constrains industrial development. The heavy financial losses of the power sector also remain a burden on public sector finances. Shortages in power are estimated at about 10 percent of total electrical energy and roughly 20 percent of peak capacity requirements. National surveys of industrialists consistently rate power supply as one of their most critical problems. The financial performance of the power sector is poor, with low economic returns.

The government recognizes the need to increase efficiency of power supply, consumption and appropriate electricity pricing. As responsibility for electricity supply is constitutionally shared between the central government and the states, improving power sector structure and ownership must be targeted at the state level.

The states' severe power sector problems are attributed to poor operational efficiency of the State Electricity Boards (SEBs), which are a key element of India's power system. Commercial losses of SEBs and State Generating Companies, which together generate almost 70 percent of India's electricity supply and provide most of the distribution to consumers, have reached the equivalent of about US$3 billion or about 1 percent of India's GDP.

The weak financial position of the SEBs also remains a fundamental obstacle to private sector investment in the power sector. Several states including Orissa, Andhra Pradesh, Rajasthan, Haryana and Uttar Pradesh have acknowledged the problems of the SEBs and have initiated comprehensive power sector reform programs.

The World Bank Group's assistance to the power sector focuses on supporting reforms at the state level to restructure power systems and policies. This includes tariff reform, incorporation of public utilities, privatization of power generation and distribution, and independent regulation.

The State of Orissa pioneered these reforms in 1996 through the Orissa Power Sector Restructuring Project with the help of a US$350 million World Bank loan. As a result, a significant portion of the state's power generation capacity and the entire electricity distribution system have been privatized.

In January 1998, the World Bank approved a US$600 million lending program to provide support for the implementation of Haryana's power sector restructuring program. This initiative uses an Adaptable Program Loan (APL), a new lending instrument which phases lending based on progress of set goals. The first phase, sup-ported by a US$60 million loan, builds the foundation of a long-term lending partnership with Haryana by helping to remove the most critical impediments to power transmission and improving the quality of power supply to remote areas. However, progress has been sluggish in moving ahead beyond the initial restructuring of the sector.

The World Bank is supporting the first phase of Andhra Pradesh's power sector restructuring program through a US$210 million loan - the first in a series of APLs totaling up to US$1 billion that the World Bank plans to provide over the next eight years. A US$150 million loan was approved in FY00 to support Uttar Pradesh's ongoing power sector reforms. Similar operations are planned in other states including Karnataka and Rajasthan.

Accelerating Rural Development

With 75 percent of the population living in rural areas, improving the efficiency of India's agriculture is key to attaining high growth and reducing poverty. While India spends twice as much on agriculture as its East Asian neighbors, the composition of its public spending is not conducive to faster, labor-intensive rural growth and poverty reduction.

Accelerating rural development and poverty reduction requires cutting spending on poorly targeted input subsidies; investing in rural infrastructure; providing more effective rural services, especially to the poor and socially-excluded; improving management of water, forests, and other natural resources; and liberalizing the rural economy, including the rural financial system.

Rural development projects constitute the World Bank's largest number of projects in India's portfolio. Lending and policy discussions focus on state-level efforts to reduce input subsidies such as water and power; improve the operation and maintenance of existing facilities; promote sustainable management of water, forests, and other natural resources; and improve public spending on the dissemination of agriculture technology and extension, rural infrastructure, and social safety nets. At the central level, the World Bank Group is concentrating it s policy dialogue in reform areas such as food, credit, and fertilizer policies and centrally sponsored schemes that are critical to the performance of the rural economy.

Protecting the Environment

India is one of the 12 "megadiversity" countries in the world that collectively account for 60 to 70 percent of the world's biodiversity. The biodiversity of India's forests, grasslands, wetlands, and marine ecosystems faces many pressures. These include air and water pollution, cattle grazing, deforestation, hunting, exploitation of non-timber forest products, uncontrolled fires, and intensive development. India's cities are also beset by environmental hazards, sanitation problems, and population growth rates twice that of the national average.

The World Bank has supported projects for forestry and biodiversity protection, soil and water conservation, industrial pollution and prevention, and sewage disposal and sanitation. The World Bank is also supporting initiatives to strengthen institutions and agencies that formulate and implement environ-mental policies and monitor and enforce environmental legislation. Integration of environmental concerns into sectoral approaches is a major priority for the World Bank, such as identifying opportunities to combine environmental measures with ongoing economic liberalization.

Social Development

In recent years, the World Bank has increased its commitment to social and environmental concerns in India and has significantly strengthened the Social Development Unit in its New Delhi office. While progress has been uneven, involuntary resettlement is being addressed by helping borrowers with their resettlement policies and programs and by building their capcity to deliver on these policies.

Efforts are also directed at address-ing child labor in World Bank-assisted projects. In addition to identifying and developing counter-strategies for projects that may indirectly or directly involve working children, the World Bank is supporting government efforts to deal with child labor through World Bank-financed projects.

The World Bank continues to support government programs to draw women into the mainstream of economic activity by improving their access to resources and services like agriculture extension, and training. It is also helping to improve the welfare and status of women through support for family planning, nutrition, health, technical education, and vocational training.

(Source: World Bank)

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